Paraplanners and financial planners work to long timescales. The outcome of pension and investment planning will often not be apparent for decades. So paraplanners need to think long term, examine the evolving tax landscape and consider how it might impact clients.
In February, the Resolution Foundation reported on the rising costs the state will face over the next decade.
The report predicts “a decade of significant economic change” and looks in detail at two areas associated with an ageing population – pensions and healthcare. The cost on the state pension is expected to rise from just over £108bn in 2022–23 to £132bn by 2030–31.
“Longer lives do matter for health spending, although less than is often assumed,” reports the Resolution Foundation. “Much more important is our morbidity – the length of time spent in ill health – which has been rising recently: 34% of 85 to 89-year-olds had two or more diagnosed long-term conditions in 2006, rising to 44% by 2015.”
Paying for an aging population
The government will increase the tax take in the next four years from 33% of GDP in 2021–22 to 36% by 2026–27. But, the Resolution Foundation predicts more tax increases may be necessary. Their report points out that, compared to other developed economies, “The UK raises relatively low levels of tax as a share of GDP.”
Planners and paraplanners need to alert clients to the probability of tax increases over the rest of this decade.
Where will taxes rise?
There has already been resistance to increases in employment and business taxes such as the upcoming increase in national insurance contributions (NIC.) Increasing such taxes will trigger demands for higher wages to compensate for the reduction in take-home pay and increase business costs. These factors will reinforce inflationary pressures.
A central plank of the UK’s tax strategy is that business profits will steadily increase and the tax on these profits will consequently increase. Government will not want to increase taxes that inhibit that growth.
Perhaps taxes on capital will increase. Capital gains tax is currently levied at a historically low rate. Increasing the rate wouldn’t impact businesses to any great extent.
The inheritance tax ‘take’ could be significantly boosted, not by increasing rates, but by reducing some of the reliefs and ending the beneficial treatment of ‘non-doms’. Again these measures would not significantly impact businesses.
For many individuals their pension is their biggest asset – legal niceties aside. Pensions enjoy a very benign tax regime although one with complex elements. Why assume that such a regime will continue?
What should planners be doing?
It’s important to tell clients that the tax landscape never stays still. Clients should be encouraged to take advantage of those elements which are currently ‘client friendly’. Boosting pension contributions – for all family members – is a good starting point.
Share and ‘collective’ portfolios, potentially within the scope of capital gains tax, should be held in ‘individual saving accounts’ (ISAs). Each spouse or civil partner should have an ISA.
Where contribution limits mean that shares and ‘collectives’ have to be held outside the ISA wrapper, then the holdings should be equalised between spouses or civil partners. Other assets should be held jointly.
You should make any inheritance tax effective transfers – usually potentially exempt transfers –as early as possible. Where there’s a concern over the recipient’s financial sophistication, a contribution to that individual’s pension scheme might be the answer.
Gerry Brown is a Consultant at QB Partners. He began his professional career as an inspector of taxes and later qualified as a chartered accountant. He’s worked at a number of financial services companies providing technical support and contributes to our Diploma in Paraplanning (DipPP).
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